21st January 2016
Helal Miah, investment research analyst at The Share Centre, explains what the third quarter trading update from Royal Mail, announced on Thursday, means for investors…
Royal Mail’s nine-month performance was in-line with expectations as the group reported this morning that revenues increased by 1% over the period.
This was supported by a 4% increase in parcel volumes as new contracts were signed, there were more imports of parcels and ParcelForce Worldwide saw volumes increase by 16%.
However, investors should acknowledge revenues from the division rose by just 1% due to the impact of the competitive environment.
The market will also not be surprised to hear that letter volumes fell by 3% while revenues in this division also fell by 2%.
On the contrary, investors should note that the group reiterated its European GLS business continues to show good growth with an 11% increase in volumes, which was ahead of expectations.
Furthermore, investors should also be pleased to hear that management does not expect a decline in margins here.
Overall, these are relatively pleasing results for the group and this sentiment was demonstrated by the shares rising by 4% in early trading on Thursday.
The crucial Christmas period saw encouraging numbers and the group’s cost control programmes remain on schedule.
However, Royal Mail operates in a very competitive environment where price reduction and margin compression is likely, while the letters business can only fall.
As a result, we maintain our ‘hold’ recommendation on the stock for investors looking for a balanced return and willing to accept a medium level of risk.